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For many small business owners in Alberta, the question of when to incorporate is a significant milestone in their business journey. Incorporation can bring tax advantages, legal protection, and credibility-but it also comes with added responsibilities and costs.
At Gemini Bookkeeping Services Inc., we help entrepreneurs navigate this important decision with clarity and confidence. In this guide, we'll walk you through the key considerations, CRA implications, and practical indicators that signal when it might be time to transition from a sole proprietorship to a corporation.
What Does It Mean to Incorporate?
Incorporation means creating a separate legal entity for your business. In Alberta, you can incorporate provincially (with Alberta Corporate Registry) or federally (with Corporations Canada), depending on where you plan to operate.
Once incorporated, your business becomes its own legal "person"-it can own property, enter into contracts, and be liable for debts independently of you as the owner.
Benefits of Incorporating
Limited Liability Protection
As a sole proprietor, you are personally liable for all business debts. Incorporation helps protect your personal assets by separating you from your business's legal obligations.
Tax Advantages
Corporations pay a lower corporate tax rate on the first $500,000 of active business income. In Alberta, the combined small business rate is just 11% (8% federal + 3% provincial). This is significantly lower than personal income tax rates.
You also have the opportunity to:
- Defer taxes by leaving funds in the corporation
- Split income with family members (if structured properly)
- Access the Lifetime Capital Gains Exemption (LCGE) when selling qualifying shares of a Canadian Controlled Private Corporation (CCPC)
Credibility and Growth
Incorporation may help your business appear more professional and established-useful when seeking financing, grants, or contracts with larger companies.
Continuity
Corporations continue to exist regardless of changes in ownership or management. This makes succession planning easier.
Drawbacks of Incorporating
Increased Costs
There are fees to incorporate and maintain a corporation (lawyer, accountant, annual returns, bookkeeping, etc.).
More Compliance
You'll need to file separate corporate tax returns (T2), maintain legal records (minute book), and possibly register for payroll, GST, and WCB.
Double Taxation (If Not Managed Properly)
Corporate earnings are taxed, and so are dividends or salaries paid to you personally. Strategic planning is key to avoid unnecessary tax.
When Should You Incorporate?
While every situation is unique, here are common indicators that it might be time to incorporate:
Your Net Income Is Growing
If your business is earning more than you personally need to live on, you can leave profits in the corporation and defer personal tax.
You're Taking On More Risk
Businesses that carry liability-such as construction, consulting, or retail-may want the legal protection that incorporation offers.
You Want to Be Paid as an Employee or Shareholder
Incorporation allows you to pay yourself through a combination of salary and/or dividends, offering flexibility in how and when you are taxed.
You Plan to Involve Family
Income splitting and succession planning are easier in a corporate structure-especially if you plan to pass the business to your children or spouse.
You Want to Sell the Business One Day
Incorporation makes your business more attractive to buyers and may allow you to claim the LCGE, potentially sheltering up to $1 million in capital gains from tax.
Still Unsure? Talk to a Professional
Incorporation is a big step-and it's not a one-size-fits-all solution. At Gemini Bookkeeping Services Inc., we help Alberta business owners assess their current situation and long-term goals to determine the best structure for success.
Whether you're a solopreneur just starting out, or an established business ready to scale, we offer personalized guidance to ensure your business is compliant, tax-efficient, and well-positioned for the future.
Ready to explore incorporation?
Let's schedule a consultation and walk through the process together. Contact us today-we'll help you make an informed, confident decision for your business.
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